Friday, January 30, 2009

So much discussion is going on today about “Big Government.” The urgency of the talk is, of course, a result of the Obama stimulus plan…and TARP…and a possible “bad bank”…and possibly even more spending and tax cuts coming down the line. There is even a new book out called “The Case for Big Government,” by Jeff Madrick.

Has anyone been to Washington, D. C. lately?

Tell me what someone means when they say…”small government”?

It’s all relative…right?

To me the talk about “Big Government” or “small government” is so much wasted energy. The United States government IS big! It is going to STAY big! There is no way that I can see it becoming smaller. And, this doesn’t even take into account that we are faced, throughout the world, with dealing with other BIG governments.

The question to me is not about the size of the government. I would even argue that the size and complexity of other organizations within the country and the problems that must be dealt with require that the government be big. To me the question is about how this government goes about its business…that is how the public sector interacts with the private sector.

Last February, I put up a post on this site titled “More on Hamiltonian Government” (2/27/2008). In this post I argued that government faces three problems that put a limit on its power. These problems relate to the creation of incentives, the lack of sufficient information, and the speed at which events are taking place in the modern world. These limits, as I saw the situation, restricts what a government can achieve and directs us to those things a government can do that are actually helpful. The conclusion is that a government can have a positive effect on the private sector if it focuses on process rather than outcomes. If it focuses on outcomes, a government may create more problems than it solves.

Let’s just looking at the first of these problems today, the problem of incentives: the basic incentive for government is to “improve” something…make something better…or less bad. (On January 10, 2009, I wrote a post called “Improvers” to discuss the topic a little more deeply.) The government doesn’t have a lot of specific incentives…except in cases like the military…win wars…keep the peace…and so forth. So the primary goal is to “improve” things.

The problem with this is that in trying to “improve” things, the government can often create other incentives that have undesirable results or results that are the exact opposite of what they would like to achieve. (To see some specific cases please refer to the popular book…and blog…called “Freakonomics” developed by Steven D. Levitt and Stephen J. Dubner.) The difficulty occurs when people attempt to focus outcomes and state their objectives in specific goals. Setting the specific goals can then create other incentives that can harm or destroy the purpose of the whole effort the government has undertaken to “improve” things.

This often happens in situations involving the government’s monetary and fiscal policies. For example, the goal to avoid recessions can create government policies that send out messages to the private sector that can totally destroy the initial goal of the government. When Alan Greenspan, chairman of the Board of Governors of the Federal Reserve System became so concerned about the possibilities of an extended recession following the bursting of the stock market bubble in the early 2000s that he kept the target interest rate of the Fed excessively low for an extended period of time, lower than the rate of inflation the economy was experiencing.

The result…excessive borrowing took place because the real rate of interest was negative…it paid people to borrow…a bubble in asset prices occurred in housing markets…this was passed into the capital markets through securitization…and this funneled into other areas of the capital market, especially more and more exotic derivative instruments…and as people continued to create credit at an exponential rate and as people continued to leverage up their balance sheets…the financial markets…and the whole economy…became more and more fragile.

Why did people…even sensible people…do these things?

The incentives created in the credit expansion distorted things. If, for example, I run a hedge fund and I want to earn a slightly better return on my portfolio than you I can, say, try one of two things. For one I can increase the riskiness of the assets I hold…maybe purchase securities backed by subprime loans rather than corporate bonds. Or, I can increase the leverage on my balance sheet to stimulate higher net returns on my portfolio. In either case I am increasing the riskiness of my portfolio in order to gain an advantage over you.

And, how can I get away with this. Well, I know that Alan Greenspan is so worried about avoiding a recession that he will continue to support the credit expansion even in the face of riskier asset portfolios or greater use of leverage in the system. And if this continues on for two or three years, the competitive pressure to do well and outperform my competitors will grow and grow. I will continue to increase the risk of my portfolios and to increase how much leverage I introduce to my balance sheet.

And, if I don’t do it? Suppose I am a relatively conservative portfolio manager and I don’t believe that I should either increase the riskiness of my asset portfolio or raise the amount of leverage on my balance sheet…what happens? Over time, as my competitors earn, even a few more basis points on the return on their portfolio…my clients will start withdrawing money from my funds and placing it with my competitor. If this environment is sustained by the government, I will either have to close my fund or capitulate and change my beliefs and become more aggressive. And, if I don’t have that choice and work for someone else…I will be replaced with someone that is more aggressive.

Is this outright greed that is driving this scenario? Are these people “bad” or “excessively crass” in their behavior?

These people want to perform well…that is true…but, I don’t believe that they are addicted to avarice any more or less than most people. The incentives changed on them and they just responded to the competitive pressures that were present in the market place. In my estimation…these incentives were set up by the government in following the incentive they placed high on their priority list…government officials wanted to improve things…they wanted to keep a recession from happening.

Government is going to have its incentives; and the private sector is going to have its incentives. The problem is not one of whether or not the government is big. The problem is related to how the government is going to implement its actions to achieve the goals it sets for itself. Often, as in the example I have given, the “good intentions” of the government can be translated into actions that create the “wrong” incentives for the private sector. If the private sector responds to these “wrong” incentives…and they will…the ultimate result may be totally the opposite of what the government was trying to achieve in the first place.

The problem is that the ultimate results occur at such a distance from the cause that the two are not tied together. Do people tie Greenspan’s attempt to avoid recession early in this decade with the current financial collapse?

Tuesday, January 27, 2009

Milton Friedman always claimed that he was a liberal…but, that he was a “classical” liberal. By that he meant that in terms of economics and liberty he was more like a liberal in the 18th century and the early 19th century. Liberalism shifted on him…or as Ronald Reagan said about the Democratic Party…he didn’t leave the Democratic Party…the Democratic Party left him. Friedman felt the say way about the policies and programs proposed by 20th century…and early 21st century liberals.

I am in this dilemma as well. I tried to lay out my position in my last essay, posted o January 24. In that post I claimed that I was an Information Libertarian. This meant that on the side of the cultural wars and civil rights I tend to come down with the modern Liberal…I am for openness, transparency, and liberty. However, on the side of capitalism and the role of government in the economy, I tend to come down on the side of free-market capitalism and minimal government intrusion into economic affairs. My liberalism…as it were…is split…right down the middle.

Liberalism, as Friedman argued, used to include free-market capitalism as one of its components. What happened? Why did free-market capitalism move from support on the left of the political spectrum and land on the right? Good questions.

Currently, I am reading the book titled “The Ascent of Money” by Niall Ferguson. In the Introduction to his book Ferguson makes several observations about how the world looks at finance and financiers that carry some relevance for the questions asked in the previous paragraph.

Ferguson writes: “Throughout the history of Western civilization, there has been a recurrent hostility to finance and financiers, rooted in the idea that those who make their living from lending money are somehow parasitical on the ‘real’ economic activities of agriculture and manufacturing.” He cites three causes of these attitudes:• Debtors have tended to outnumber creditors and the form have seldom felt very well disposed towards the latter;• Financial crises and scandals occur frequently enough to make finance appear to be a cause of poverty rather than prosperity, volatility rather that stability;• For centuries, financial services in countries all over the world were disproportionately provided by member of ethnic or religious minorities, who had been excluded from land ownership or public office.Furthermore, in terms of business, in general, there have been wide disparities in income distribution and this can be highlighted by the earnings of corporate executives in recent history and the increases they kept receiving over the years, far exceed what individual workers receive, the including small increases that they have received in recent years.

Ferguson goes on to say that one of the real paradoxes of the ‘liberal’ or ‘radical’ prescription for the elimination of the use of money is that one of the major constraints on economic development and growth is the LACK of financial institutions, the absence of banks…not the presence of them. And, this not only applies to nations, or regions, but also to neighborhoods and areas within cities. That is, for economic development to take place there must be some kind financial services present or development is not going to happen or be constricted.

However, Ferguson also says that “If the financial system has a defect, it is that it reflects and magnifies what we human beings are like.” For example, behavioral finance has shown that “money amplifies our tendency to overreact.” Also, the financially knowledgeable can use their talents and skills to multiply opportunity whereas those that are not can be severely hurt. Financial presence can accelerate mobility…both upward and downward. “The rewards for ‘getting it’ have never been so immense. And, the penalties for financial ignorance have never been so stiff.”

What Ferguson seems to be saying is that the presence of free-market capitalism and modern financial institutions and markets are like financial leverage…they can magnify both positive results and negative results. The way this seems to work is that ‘the few’ get very great benefits from capitalism whereas the ‘many’ end up with only meager results. That is the distribution of benefits is very skewed with smaller numbers at the top with a substantial number at the bottom.

The thing that doesn’t get mentioned as much is that, on average, countries that are democratic, capitalistic, with a great amount of liberty have much higher living standards than do countries that don’t offer these things to their citizens. The income distributions may be very skewed and unequal in the former countries but even those that are nearer the bottom are much better off than many of the citizens in these other countries. This doesn’t make the skewed income distribution right…but the fact that there are higher living standards relative to those in other countries is relevant.

The point is free-market capitalism can create wealth, it can create inequalities in income distribution, and since the inequalities can be quite substantial and magnified. Given these results, people can focus on the issue of fairness, not only of relative results at one particular time but also over time in terms of economic fluctuations. Thus, criticism can be leveled at financial capitalism because of these outcomes and because the people further down the pyramid outnumber the people at the top, discussions and debates about the validity of capitalism can be dominated or, at least, forcefully engaged in.

I would like to make three points in response to this. First, there does need to be oversight and regulation existing side-by-side in a capitalistic system…it cannot just be an open, do-as-you-will environment. This would include greater openness and transparency within the business and financial system. The capitalistic system can run better. Second, there does have to be safety nets, insurance programs, education, financial institutions to serve poor areas and other forms of help to reduce some of the risks and extreme results that can come about in free-market capitalism.

Finally, the government must not be too active in attempting to fine-tune the economy. The government can set up incentive systems that drive people and businesses to take excessive risks and make unwise decisions. The most recent eight years is a case-in-point. Through its monetary and fiscal policies the Bush43 administration created an environment that incented executives to take on more and more risk, to assume higher and higher leverage, and to bring new and untested innovations into the market place. The financial…and economic…system became more and more fragile. The collapse came. And, who got the majority of the blame…the executives running these institutions…those running the government escaped without the fingers being pointed at them at all…or, very little.

What I would like to emphasize is that small, entrepreneurial businesses provide most of the dynamism of a free-market capitalistic system, most of the new jobs created, large amounts of wealth that is relatively well distributed, and it adds substantially to the upward mobility in a country. This system thrives on information, trying new things, gathering more new information, innovating, learning, and growing. This part of the system…even the modern liberals like. It is the big, set-in-their-ways organizations, who create much of the unhappiness and the inequality.

I, of course, like this breed of entrepreneurs that exists below the horizon covered by the large, clumsy behemoth. It is also consistent with my support of liberty in the culture wars and civil rights. It is also consistent with support of the “new” in art and literature and music and life style. It is consistent with what being an Information Libertarian is all about…at least, I believe it is.

Saturday, January 24, 2009

I have claimed over the past several years that I am an Information Libertarian. I have defined an Information Libertarian as one who believes in the free flow of information, complete access to information, and the eventual triumph of information over all those that attempt to hide, control, or in anyway manipulate the use and access to information…for whatever purpose. I believe in openness and transparency in all activities.

I put this last sentence into the paragraph because it is hard to say that there are cases where perhaps some secrecy is necessary and still call oneself an Information Libertarian. Yet, I will admit, there are some situation where, perhaps, some information should be controlled…like in situations of national security…or, in the case of the hurt or harm that might be imposed on someone, say, who is dying.

But, this then gets back into the argument for balance…something that I dealt with in my post of January 19, 2009. Because we work in a world of incomplete information we can only say that there may be some situations that we have to deal with in which the “best” (whatever that means) decision we make is to keep some information “under wraps”…keep it secret. Still, to me, to argue that one is an Information Libertarian means that one should, in reaching a balance, always err on the side of openness and transparency. One should always lean to the side that argues for the release and spread of information…whatever that information is about.

It is difficult to be an Information Libertarian in the political world that exists today. On the one side, an Information Libertarian tends to side with what would be considered to be the left, or the progressive, side of the political spectrum. In other issues, an Information Libertarian would tend to side with what would be considered the right, or the free-market capitalistic, side.

This conflict puts the Information Libertarian in a conundrum because, taking one’s beliefs seriously, one feels constantly ill-at-ease with the wide chasm that seems to exist between these two extreme positions. Wouldn’t it be much nicer if one could one could find one location on the political spectrum where all that an Information Libertarian supports would be located?

On the left side of the spectrum, the Information Libertarian supports a free press, no censorship, freedom to publish anything, freedom to produce anything in the theater, movies, and so on, freedom to compose anything, paint anything, sculpt anything, and basically freedom to create, compose, write, or perform any kind of information one feels compelled to. Obviously, this refers to political as well as cultural efforts.

It also refers to individual thinking, individual decision making and so forth. These, of course, are all generally associated with those ideas, laws, and rules that are looked on as “liberal” as the way of thinking. Of course, all of these must be incorporated within the legal and social structure of groups, organizations, governments, and other cultural arrangements so that people can live and work and thrive together. One thinks of the idea of a “civil” society…one in which people can get along with each other and not harm one another. The fundamental concept here is the idea that a person cannot be allowed to yell “fire” in a movie theater filled with people. Where one can, one leans to the side of as much freedom of expression as is reasonable.

On the left side of the spectrum, the Information Libertarian supports free-market capitalism. Of course, as with the other side, a societal balance must be achieved between unfettered markets and regulation or oversight. One can argue, and I do, that the freedom of markets enhances the living standards and effectiveness of a society through the greatest encouragement of information exchange, innovation and progress. This kind of a society encourages the mobility and fluidity of people, the breakdown of exclusiveness and discrimination, and the spread of wealth, and, consequently, power throughout the society so a truly democratic form of government can exist.

It refers to investigation, exploration, discovery, debate, dialogue, collaboration, and scientific advancement in all forms. It produces an environment where ideas can go from just thought to creation to application to consumption. The world of free-market capitalism, because of the fact that it supports meritocracy rather than aristocracy, should provide the environment for all that produces openness and transparency within the whole society. Therefore, a society that supports free-market capitalism should support the spread of information, the enhancement of education, and the existence of the public forum where anything and everything can be discussed. But, again, I add the caveat that there are limits or boundaries that people or groups cannot go beyond except to the detriment of the society. Yet, one still needs to err on the side of liberty and freedom in contemplating the constraints that might be imposed on the society.

This last side of the argument may draw some skepticism from many readers at this particular time in history. With the collapse of the financial markets throughout the world and with many economies in recession or expecting something worse, a lot of analysts have pointed to the failure of free-market capitalism to operate without sufficient oversight and regulation.

I have two responses to these charges. First, with a greater flow of information in the business world…more openness and transparency…there would be much less for today’s more progressive thinker to be concerned about. If businesses had to reveal what they were doing in all areas of their operations, then people, groups, and markets would be able to respond to the information and the “bad” conditions, etc., for which the progressive thinkers condemn free-market capitalism. I argue that greater information availability and dissemination would lessen discrimination and bias, create greater mobility in markets, which I believe would reduce inequities and inequalities, reduce risk taking and other things that people contend create crises.

The second point has to do with how effective government or oversight or regulation is in overcoming the problems of free-market capitalism. It is my belief that government, or oversight organizations or regulatory bodies often create an environment in a free-market economy that can lead to the subsequent behavior that come to be criticized in the future as the “problems” with free-market capitalism. To me the current financial crisis is a perfect example of this type of situation.

I don’t have time to go into this in this post but my belief is that government actions can lead to the creation of incentives for business people and organizations to act in a self-destructive way. On top of this the government counters the consequences of their initial actions thereby creating moral hazard with respect to banks, investment banks, financial companies, business manufacturers, retail organizations and so on, who then enter into competitive behavior that makes themselves riskier and riskier finally leading to a point where the system becomes so fragile that it collapses of its own weight.

I would put the theory that the “government is the cause of the problem” up in opposition to the theory that “the problem with the world is the behavior of greedy business people and speculative financiers.” If anyone needs a quick bit of evidence that government activity, in this case “Conservative” government activity, can be harmful to the economy and the society, I submit the example of the eight years of the Bush 43 administration.

The apparent contradictions in policy prescriptions in today’s world that come from claiming to be an Information Libertarian can present a real hornet’s nest of problems. In today’s post my effort is to begin to get these problems out into the air in order to start a discussion of how these contradictions might be resolved.

Monday, January 19, 2009

Every leader must reach some sort of balance in the areas in which they are trying to lead. These leaders must also reach some sort of balance between the areas in which they are trying to lead.

I am not arguing that the leader should not have his or her own position within a given area. I am not arguing for wishy-washy compromise. I am not arguing for an un-grounded pragmatism.

What I am arguing for is for a leader to strike an appropriate balance of competing forces not only within a given area of interest but also between areas of interest. Notice too that I said “an” appropriate balance…not “the” appropriate balance. In addition, there is another point of contention as well. The balance that is achieved in various areas and between various areas will change over time…a balance cannot be held onto indefinitely.

The problem is that in any important area (or even not-so-important areas) of interest within the scope of a leader’s responsibility there will be competing positions…even within the group of people that are the leader’s closest allies. The same will be true when it comes to discussing priorities between areas of interest. There will be many competing positions…and those that may be allies in one area may be opponents in another…and so on.

And, within such an environment it is so important to remember that you may have to count on someone on a very, very important issue even though you fought tooth-and-nail against that person on the last thing you worked on. Even though people may oppose you there is a very good chance that sometime soon in the future you will be working with the very same person.

Achieving balance is important even if there are only two competing ideas within an area of interest. It is very seldom a winner-take-all situation. In many cases, you will be working with the “other side” in some capacity in order to carry out the goal that has been decided upon. Whether it be in government, or business, or in friendships, or in families…once a plan of action has been decided upon…it is necessary for those involved in the discussions to bind together in order to make something happen. The “winning” side is not the one that must move forward and execute the plan.

It, of course, becomes that much more difficult in the usual situation when there are multiple positions that have to be reconciled. People still have to go forward. They have to act and must avoid some form of paralization that could occur if some of the parties involved decide to opt out of the effort. Balance must be achieved so that people feel that even though they may not have gotten all they wanted in this situation that there is a good chance they may achieve more of what they want in another one.

Furthermore, as mentioned, care must be achieved in reaching a balance between different areas of interest. Here there may be more a notion of priority setting…we can do this now…but, we can only work on that thing partially at the present time…and we will have to wait a year or so before we can get to the other thing. Again, balance has to be achieved because you want to achieve a whole portfolio of objectives and not all of them can be attained at the same time. Thus, plans must be made for how the different areas will be addressed in what order and so forth.

Again, the leader will have to deal with shifting sand in terms of those that they are working or will work with on some issues, who will not be so warm to other areas and to those that they will be working with on different areas in the future. Everyone is a potential ally…and everyone is a potential foe. But, in one way or another, all of these individuals must work together in some form, on some issues, at some time in the future.

Having written this, I must go ahead and strongly emphasize two very, very important things. First of all, arguing as I have does not mean that you don’t have strong feelings about the different issues that you will be dealing with. On the contrary, it is very important that the leader have strong ideas…and it is crucial that the leader have a strong sense of who they are…and it is also a requirement that the leader feel comfortable within their own skin. That is, not only does the leader know what he or she stands for but it is also important that they know themselves and are unified and whole within their own person.

The further the leader is from this ideal the less confident they are in their ability to lead. And, the further they are from this ideal, the more they seek certainty of opinion and control over the chaos that is swirling around them. A leader with this shortcoming wants only people around them that agree with them and demand that these people be loyal through thick and thin.

A leader like this is not really a leader and will, in almost every case, fail in what they set out to do.

Second, it is not a weakness to work for balance. Reaching an appropriate balance is a secret of success. Achieving an appropriate balance is the way to build strong teams that can accomplish what they set out to accomplish. And, even though different combinations of individuals or groups may make up the team the sets out to attain another objective, the balance that is achieved within each team and between teams is vital to gaining more successes than fewer ones.

It takes a strong person who knows who they are to achieve an appropriate balance within a given area…and also between areas. Strong because they have to combine people and groups that also have strong wills. Strong because they have to lead people to work together. Strong because they have to convince people to postpone something they believe is very important until some time in the future in order to work on something right now that these people do not feel is as important as the other thing.

Barack Obama has said that he has learned quite a few things from President Ronald Reagan. I believe that one of the things that he learned from Reagan was the ability to attain balance when striving for various and sometimes contradictory goals. I don’t think anyone around would argue with the claim that Reagan had very strong views. But, he compromised to achieve balance. He sought supporters from all different positions of thought. And, he maintained friendships so that he could reach out to individuals in the future even though they might have had substantial differences on given issues in the present. In this way Reagan got a lot of what he wanted…not everything…but a large amount. By starting out with strong positions he was able to keep the balance in many areas tilted to his end of the spectrum…but, he gave in to many in order to keep the doors open and the discussions continuing. Reagan knew who he was, what he believed in, and was very comfortable in his own skin.

It is easy to pick on Bush 43 as the one at the other extreme. Bush 43 I would not call a leader. Bush 43 wanted certainty. He never worked for balance. And, he also demanded loyalty of those on his “team” above all else. I really never got a sense that he was really comfortable with himself. He wasn’t the “star” that his father was. He had very little intellect or talent. He “forced” himself to stop drinking and this effort of will was constantly in front of him as he “forced” his way through life. Objectives were either acceptable…or unacceptable…no in-between. And, he failed…with miserable incompetence…and almost everyone that surrounded him was tarnished in some way by the failure of his administration.

The main goal of a real leader is to achieve a sufficient balance in all that he or she is doing and with all the people that he or she is working with. Achieving such a balance is necessary if one is to be a successful leader…and achieving such a balance is a sign of personal strength…and inner wholeness.

Thursday, January 15, 2009

President-elect Obama is pushing hard to formulate his economic stimulus plan and have it enacted at the earliest possible date. First, he was shooting for January 20, 2009, the day of his inauguration as President of the United States. Then he was aiming for President’s Day in February. Now…there is a good deal of uncertainty.

The idea of an economic stimulus plan is popular with the people of the United States. It is also popular in Congress. But, Congress is a deliberative body…and…this raises the level of uncertainty of when the package will be passed and signed into law.

We have just experienced this past fall when Congress was stampeded to act…we even had a panicked Federal Reserve Chairman Bernanke tell Congress on a Friday evening in September that the bailout package had to be passed the next Monday or “all hell would break loose.” And, so Congress gave up some of its deliberative power and moved quickly…although not as quickly as the pale and frightened Bernanke called for.

And, Congress has been regretting the quickness with which they passed the bailout bill ever since. Basically, Congress gave Hank Paulson, Secretary of the Treasury, and the Treasury Department a blank check with not controls and no oversight…at least for only $350 billion of the package. And, Congress…and apparently the Treasury Department…has no idea where the $350 billion has gone and how it has been used. It is, apparently, just gone!

Action like this is expected when there is a royal head of state or a dictator. That is, a dictator or a tyrant can change his or her mind on the spot and move this way or that way on a whim. The founders of the United States did not believe that this was a good idea. The policies and programs of a government should be discussed and debated and lingered over…and not just rushed into. There should be some “conservative” element within the government so slow down the process and get all sides of the issue a chance to be resolved. The founders created Congress to slow things down and muddy the waters.

Of course, there are times when decisions must be made in relative quick fashion…but, even issues that require relatively quick action can stand some time for reflection. Obviously, a balance has to be reached between rapid decision making and deliberation, but the general idea of the founders was that a country should err on the side of deliberation rather than on the side of hasty decision…frustrating though it may be.

Coming back to the present, I believe that the United States government, Congress, should err on the side of deliberation on the stimulus package. We are talking about a lot of money…and for a relatively long time frame.

We are talking about federal deficits of $1.0 trillion or more, not only this year…but next year…and the year after that…and so on…

We are talking about how much of this debt will be monetized…this year…next year…and so on.

Some are even talking about the United States becoming, financially, like a banana republic.

Yes, there are potentially real dangers on the other side. The economic slowdown could become an economic collapse…a second Great Depression.

But, there is no indication that the stimulus package will do what many are saying it will do. There is uncertainty about the combination…increasing spending or producing tax cuts. There is uncertainty about the speed at which programs can be implemented. There is uncertainty about whether the proposed spending will even have the desired effect of stimulating other spending. There are further questions about the ability of the financial system to support the large package.

Deliberation must take place! Even though the situation is serious…we cannot be rushed into this without discussion, debate, and contention. Yes, we want the result to be supported in a bi-partisan way…but this may not be fully possible. However, we want those that are not in favor of the stimulus program to be able to fully express their concerns.

There are too many concerns surrounding the whole situation to move precipitously.

Bernanke panicked the Congress in September to move hastily on the bailout package. There are many, many regrets about this. And, the feeling is that maybe Congress really did not have to move so quickly.

In my experience, many decisions that seem so urgent at the time they occur can really be reasonably postponed. Again, this is a judgment call so the answer is not cut and dried. Still, I have found that it is good to slow down and discuss things in most cases. This leads to a consideration of more alternatives and results in better decisions in the end.

I believe that the founders of the United States were correct in their wish to have this “conservative” element built into the structure of government. We need to take some time to examine issues and the potential solution to the problems the issues contain. We need a deliberative body that will do its work…deliberatively.

Let’s give Congress some time to consider the Obama stimulus plan. Let’s not be rushed into a program that has been hastily conceived and forced through into law by the new administration.

As that world famous philosopher Winnie-the-Pooh said, “A thought may sound very thingish when it is inside your heard, but it may not sound thingish at all when it gets out into the air.”

Let’s follow the advice of Winnie-the-Pooh and get these ideas about the stimulus plan out into the air and see if it is thingish or not!

Saturday, January 10, 2009

I have just finished the book “Empire of Debt” by William Bonner and Addison Wiggin. I won’t focus on much of the content of this book for I am doing a book review on it for Speaking Alpha and the reader should go there for a discussion of the book, itself, and its major thesis. What I want to concentrate on in this post is the authors disdain for people they refer to as “improvers” and the problems these people can create within a democratic form of government.

An “improver”, as defined by the authors, is someone who wants to make improvements to the world…wants to impose his or her view of how the world should run on all of the rest of us. Of course, politics within a democracy is a perfect venue for “improvers” to show their wares.

One can get a taste of what is meant by an “improver” by checking out Bonner and Wiggin’s “Hall of Shame” as well as their “Hall of Heroes.” To them, the stars of the United States Presidents they list as villains are Lincoln, Wilson, Franklin Roosevelt, Nixon, and Bush 43 and so on. The heroes that stand tall in their book are James Garfield, Chester Harding, Calvin Coolidge, Millard Fillmore, and their personal favorite Warren Harding.

Just waiting to enter into this “Hall of Shame” is Barack Obama…just his proposals, even before taking the oath of office, are enough to bring down the abuse and ridicule of these two authors. President-elect Obama wants to make the world better for others. What a joke! What a crock of …well, you name it.

And, it is just this attitude that is walking…no, now, running…no, now, sprinting…down the path to the doom of the empire. In short, the American empire has been built upon the shaky premise that foreigners will continue to finance the debt of the United States forever and will continue, through thick and thin, to keep faith in the strength of the almighty United States dollar.

How much debt is the Obama administration going to add to the total United States debt outstanding?

Trillions and trillions of dollars!

But, this is not the focal point of this post. The focal point is on Bonner and Wiggin’s definition of “improvers” and the role that “improvers” play within a democratic framework of empire. Empires, to Bonner and Wiggin, keep their people happy and distracted by giving the masses “enemies and circuses”. That is, the thing that keeps an empire going is the diversion of its people. And, a democracy, according to the authors, is just perfect for the exploitation of the people.

Empires have always existed upon imperial interests, which mean that there are always wars on the periphery. The twist of the modern day imperialist is that they “pretend all manner of selfless and world-improving motives, every one of which is either an obvious fraud or a monumental bamboozle.” The authors go on to say that “The gist of the modern empire builder’s creed is that he has a duty to make the world a better place, and he can only do it by telling other people what to do.”

Empires need enemies…and isn’t it just convenient that when the modern empire takes on an enemy it is often done to bring liberty and democracy to the people it is fighting for. Perhaps, Bonner and Wiggin argue, one of the most difficult periods for the American empire came after the fall of the Berlin wall and the collapse of Communism because it left the United States government with no “bad guy”…no enemy. Thank goodness, they continue, for 9/11 because it gave the empire a vague, world wide enemy, the terrorist, that it could combat endlessly and without constraint on cost. Just what the empire needed to continue.

But, just as the empires of the past, these excursions cost lots and lots of money. In the past the empires extracted the funds to pay for their adventures from the defeated. The modern empire, the wealthy, prosperous empire, the empire that does not do its own saving, borrows from the poor of the world…those nations in which their people actually save.

So much for wars…now for circuses. The modern day circus, to Bonner and Wiggin, has to do with the promises and dream worlds which politicians in a democracy offer to the electorate. These promises and dream worlds can never be achieved and many attempts at attaining them leave those whose votes are solicited by the politicians worse off. To get elected, therefore, the politicians engage in lies and outright fraud. But that is the way of the modern world.

And, what is promised? Full employment. No financial pain. A home of their own for everybody. And, so on and so forth.

And, who is going to pay for the delivery of all these programs and policies?

Bonner and Wiggin tell us…China, India, Brazil, countries in the Middle East…and others in the less developed world…who save some of their income.

I keep getting off-the-point. Democracy gives “do-gooders” (those that want to make the world a better place to live based upon the knowledge the “do-gooders” have about how the world works and what should be done to make the world a better place to live in) the opportunity to make the world a better place to live in. And, so we get the modern empire…America in the 21st century.

The obvious thesis of Bonner and Wiggin is that the world would be a lot better place if there were fewer “improvers” or if the “improvers” were taken for what they are, in the authors words, frauds and cheats. They believe that people need to stick to their own business, be humble, and work hard. They believe that grandiose ideals and plans can only lead to trouble. They believe that the United States did pretty well until that incompetent fake, Woodrow Wilson became President.

Europe knew that Wilson was a fraud and laughed at him. They used him and then abandoned him and his ideals on how the world should be built. Yet, Wilson became the model for the many activist Presidents that came after him starting with Franklin Roosevelt. And, as they say, the rest is history…the history of the American Empire.

As we stand here on January 10, 2009 on the edge of financial chaos we need to develop an answer for the criticisms of Bonner and Wiggin or we need to be very afraid. The debt of the United States is going to expand dramatically over the next few years.

Who is going to finance all these trillions and trillions of dollars of American debt? Is the only way to finance this debt to monetize it? To print paper money or to electronically generate money?

Who is going to want to hold the United States dollar? The dollar lost 40% of its value between the start of 2001 and August, 2008. Will it lose 40% more? Or, 80% more? Or, 100% more?

Wednesday, January 7, 2009

The United States is coming into 2009 having established one of the largest moves to socialization in the world. The prospects for the future do not provide any encouragement for this move to slow down!

The United States has moved into a new era…and who would have thought that it would be the Conservatives in America that created the environment for this to happen.

The Conservatives were always the people who believed in discipline…of not living beyond ones means and capabilities. Yet, it became the Conservatives that led the way to uncontrolled and irresponsible behavior…on the part of the government…and on the part of the private sector.

When did it start?

When Nixon claimed that “We are all Keynesians now!”?

Did this lead to the policies of Ronald Reagan who promoted Supply-Side tax cuts that led to large deficits that went on and on?

And this led to Bush 41 and Bush 43 and their undisciplined fiscal behavior?

The Republican Party…like most parties…is a conglomerate of groups with disparate or even conflicting positions. But, Nixon drew up the new boundaries of the party and created the new culture at the top. And, what were these new boundaries?

I would like to concentrate on three: making the Republican Party the party of the South and the religious conservative; the move to fiscal and monetary irresponsibility; and the emphasis upon loyalty to creed as the primary criteria for membership.

There is no question that the Nixon “Southern Strategy” became the foundation of the ‘new’ Republican Party. Lyndon Johnson basically disenfranchised the South with his policies on civil rights and welfare. These programs completed upset the social stratification of the South and caused many citizens of that part of the country to look for a new home.

Richard Nixon provided them with that new home. But, in doing so the Republican Party had to be open to two things…even if they were sublimated in all discussions concerning the party. These two things were, first, that the party had to accept the racist leanings of the Southerners that were brought in under the ‘big tent’, and, second, the party had to openly support a religious leaning that was more fundamentally orientated. Up until the late sixties, the Republican Party had been the home of the mainline Protestant denominations. That was to be no more…they were ‘too liberal’.

These two themes brought in the South and also appealed to more rural areas of the United States. This provided a background for ascending to the Presidency, but also to provide a strong bloc of support in both the Congress in Washington, D. C., and in state houses throughout the country. It also provided a funnel for future leaders of the Party.

The second boundary had to do with the economic policies of the Federal Government. Nixon was so paranoid about getting re-elected as President that he did whatever was necessary…the rest-of-the-world be damned. Consequently, the conservative policies of ‘hands off’, constraint, and discipline did not appeal to him. This made him susceptible to advisors around him…especially John Connolly…that led him in a totally different direction. That direction included ideas about ‘big government’, deficits in the budget, wage and price controls, and an easy monetary policy. And, the last item there was connected to the withdrawal of the United States from the gold standard that served as the basis for stable economic policies. Even Franklin D. Roosevelt did not dare get rid of this peg during the Great Depression.

Richard Nixon became a “Big Government” President opening the door for a succession of ‘Conservative’ big government presidents…like Ronald Reagan (a former Democrat), Bush 41, and Bush 43. And, “Big Government” for the Republicans included building up the military…for this was the patriotic thing to do. American was the leader of the free world and therefore it needed more and more resources for the military.

The problem with “Big Government” is that taxpayers in the United States will generally not support the taxes needed to run a big government so that the big government will have to be financed by selling bonds…or monetizing the debt. Nixon did both…but, to combat the possibility that inflation could get worse he also froze wages and prices in the economy.

Whoa ! ! !

The third boundary had to do with loyalty. Since the things discussed above became the ‘religious’ beliefs of the Republican leadership, adherence to the ‘religion’ became paramount…no matter how ridiculous the stance one had to take. Loyalty to the line became the most important criteria for membership in the leadership.

And, this loyalty transcended talent, ability, or experience. If you did not believe the way the Party did…you had no chance to help the Party regardless of how good or how successful you were. How else can we explain the incompetence of the Bush 43 administration? How else can we understand the ignoring of facts and of reality? How else can we explain the lies and the cover-ups?

In the past, the Conservatives were always the Party of reality, the Party of discipline, the Party of incremental movement.

I think that these Conservatives can now say…”We told you so!”

I think that these Conservatives can now say…”If you lose your discipline, you will eventually crash!”

I think that these Conservatives can now say…”Once you crash because you have lost your discipline, there are no good choices!”

I think that these Conservatives can now say…”There is only one way to ‘right the ship’ and that is by re-establishing your discipline!”

I think that these Conservatives can now say…”Re-establishing your discipline is VERY, VERY painful!”

About Me

Professional history:
Banking--President and CEO of two publically traded financial institutions; Executive Vice President and CFO of another.
Academic--Professor at Penn State University and at the Finance Department, Wharton School, University of Pennsylvania.
Government--Special Assistant to Secretary George Romney at Department of Housing and Urban Development; Senior Economist in Federal Reserve System.
Entrepreneurial--work in venture capital and other private equity; work with young entrepreneurs in urban environment.